Tuesday, July 1, 2008

Mortgage Protection

This type of policy is sometimes called ‘Decreasing Term Insurance’ as the level of cover decreases as your outstanding mortgage balance decreases. It is the cheapest form of life cover available and the premium stays the same for the duration of the policy.

The majority of quotes that are issued on this type of policy make the assumption that your mortgage will be repaid if interest rates are less than or equal to 6%. If your mortgage interest rate exceeds this for a prolonged period of time, there may be a shortfall between what the policy pays out and the balance outstanding on your mortgage at the date of a claim.

With interest rates heading towards this 'threshold' rate at present it might be prudent to choose a policy that makes a higher rate assumption. Most insurers will allow you to select a rate of up to 9%. If you choose this higher rate, be prepared to pay a slightly higher premium.

There was a time when at least one insurer guaranteed to repay the mortgage irrespective of the interest rate but demand was low as consumers were unwilling to pay the additional cost which gave the absolute peace of mind. The cheapest option won on the day.

It may be time for insurers to reintroduce this guarantee on mortgage protection, as the exact direction of interest rates are uncertain. The cost of this guarantee is not prohibitive and robust competition for new business in this sector would ensure that rates remain competitive.

There is nothing worse than paying for an insurance policy that does not give you the cover that you want and leaves you out of pocket at a claim stage.

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